Abolition of multiple dwellings relief: throwing the baby out with the bathwater

Outside of the real estate sector, few people had heard of multiple dwellings relief (MDR) for stamp duty land tax (SDLT) until the UK Chancellor abolished it in this week’s Budget.

Those familiar with MDR probably know of it in the context of a house with a “granny flat”. Whilst many MDR claims for such properties are perfectly legitimate, in recent years unscrupulous firms have approached people purchasing properties for which a claim should never have been made. These firms amended SDLT returns to include bogus claims for MDR, promising an SDLT rebate in return for a slice of the action. When HMRC subsequently disallowed the claims, taxpayers were left out of pocket.

However, the primary policy intention behind MDR was to help those purchasing several properties at the same time for their property rental business. To understand why MDR exists, and why abolishing it is a bad idea, a short recap is required:

How multiple dwellings relief works

Where property purchases are linked, for SDLT purposes they are amalgamated. If you were to buy five flats from the same vendor for your property rental business, each valued at ￡500k, the SDLT would not be calculated on the five properties individually. Instead, it would be treated one property worth ￡2.5m. This is a problem, because SDLT rates are much higher for more expensive properties.

This is where MDR comes in. Where available, the relief recalculates the transaction by dividing the overall purchase price by the number of properties purchased. Returning to our example, claiming MDR means that SDLT is calculated on the mean value of the five flats individually, rather than their total value together. This more than halves the SDLT payable from ￡286,250 to ￡137,500.

A policy error by the Chancellor?

MDR is aimed at righting a wrong for owners of property rental businesses who buy a few residential properties at a time, usually new builds. By scrapping it to counteract spurious claims made by private homebuyers, the Chancellor is throwing the baby out with the bathwater.

Frustratingly, the Government consulted on ways to tackle spurious claims for MDR without the collateral damage of abolishing the relief, but they appear to have ignored their own suggestions.

Abolishing MDR adds costs to the rental sector when rents are at historic highs. And it could be a blow to developers at a time when building new housing is at the top of the political agenda.

What can I do?

If you are in the process of purchasing several properties and have already exchanged contracts, you can still claim MDR regardless of when you complete. However, if you have not yet exchanged, you will need to exchange and complete before 1 June 2024 in order to claim MDR.

Where the seller is an individual, this may create tension if they seek to delay exchange to 6 April 2024 to take advantage of the drop in residential CGT rates from 28% to 24%. However, in our experience most such transactions involve property developers, who will be unaffected by this rate change.

Other options for purchasers

All is not lost for those purchasing multiple residential properties in one transaction from 1 June 2024. If you purchase six or more units in a single transaction, then non-residential rates of SDLT should apply. These are much lower than residential rates.

Returning to our example, if you purchase an additional flat for ￡500k so that you are buying six flats in one transaction for ￡3m, then the SDLT is only ￡139,500. Compare this to the ￡286,250 in SDLT you would pay for purchasing 5 flats.

Where it is not practical to buy six or more units in one transaction, these lower SDLT rates could still apply in limited circumstances. For example, if it is possible to purchase a commercial unit in the same transaction as the residential units then non-residential SDLT rates should apply.

Now more than ever, it is important to get the right advice at the right time. Our Property, Private Wealth and Tax teams are here to guide you through the complexity.

The information contained in this article is general guidance only. The application and impact of laws can vary widely depending ?on the specific facts involved. The information in this article is provided with the understanding that the authors and presenters are not giving legal, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional legal, tax or other competent advisers. Before making any decision or taking any action, you should consult a Child & Child professional.